The graph below shows the performance of three growth ETFs that are all based on the S&P 500: the SPDR S&P 500 Growth ETF (NYSEArca: SPYG), Guggenheim S&P 500 Pure Growth ETF (NYSEArca: RPG) and the First Trust Large Cap Growth AlphaDex ETF (NYSEArca: FTC).
As you can see, the difference between SPYG—the top performer over the past year—and the other two growth ETFs is huge. SPYG returned 4.6 percent over the past year, while RPG and FTC lost 2.3 percent and 6.6 percent, respectively.
There are a few reasons for this large disparity, and they don’t include wildly different growth factors.
In fact, SPYG and RPG use the same exact factors to determine growth stocks.
The major difference between the two is that SPYG includes the “core” stocks that are often considered to be between growth and value, while Guggenheim’s RPG focuses on “pure” growth and excludes core stocks. RPG also weights its constituents by their growth scores, rather than their market values, as SPYG does—this alternate weighting scheme tilts it toward smaller companies.
First Trust’s FTC starts with SPYG’s S&P 500 Growth Index and keeps the companies that get the highest growth scores, as determined by its own model. It then weights constituents in tiers based upon their scores.
The decision whether to include core stocks is a huge one, as is the choice of weighting scheme. You don’t need to look any further than SPYG vs. RPG to see that that’s true.
But size also plays a significant role and needs to be taken into consideration when placing your style bets. All large-cap (or midcap, or small-cap) indexes are not created equal.